EIU Economic Update-January 2016

Exports continued its weak performance, with latest data showing a 6% decline month-on-month for October and 3.9% decline year-on-year. Tea and rubber were the largest contributors to the drop in exports, owing to difficult external conditions for these sectors. Textiles and garments dipped slightly as well, reversing the positive trend seen in previous months.

Remittances continued their steady slowdown seen for the most part of H2 2015, and for the full year 2015 remittances had contracted 0.5% YoY. In contrast, in 2014 and 2013 remittances had grown by 9.5% and 7% respectively. Lower oil revenues in Gulf States are impacting on hiring, and salaries, of migrant labour to those countries.

Private sector credit growth continued its steady uptick, growing at 27% in November, up from 26.3% the previous month. Meanwhile, CBSL decided to keep policy interest rates unchanged at the last Monetary Policy meeting, and appear to be banking on the recent SRR hike to curb credit. This rate stance may need to change in the coming months due to multiple factors – domestic inflation edging up, LKR depreciation and global interest rates rising.

Core inflation continued to edge up in December – up slightly from 4.3 to 4.5 from the previous month and from 3.2 a year
earlier. The newly launched National Consumer Price Index (NCPI), with countrywide coverage unlike the CCPI, showed a very small increase of 1.2 index points (1.1%) in December 2015 viz November 2015.

The US Fed raised interest rates, predictably, in December and indicated what the 2016 tightening cycle will look like. Markets
had priced this in and so hardly any reaction was seen. However, the speed of tightening remains to be seen – whether the Fed will raise rates at a faster or slower pace than analysts anticipate.

Emerging Markets are continuing to show substantial stress, with fund outflows and depreciation driving this. One of the largest EMs, Brazil, has now dipped firmly into recession territory, along with Russia. Commodity (including oil) exporters are facing constraints, and are contributing to the pullout of funds from EMs.

Early January was a disastrous period for global equity markets, with massive sell-offs in both developed and emerging economy stock exchanges

China’s policymakers continue to grapple with a tricky economic transition. Stock market volatility hit again in late December and early January, with messy interventions to try and stem this.

Oil prices dipped below US$30 a barrel but are likely to remain around the $35-40 mark for the most part of the year. Slowing growth in China, supply glut from the OPEC, continued supply from the US, and new production from Iran post-sanctions, are contributing to this.